After several years of turbulence within the global insurance industry, things finally begun to settle down during 2014. The financial crisis caused many of the world’s insurance markets to enter periods of turmoil, as uncertainty over the health of economies caused the industry to see a slowdown in activity. However, 2014’s relatively stable economic conditions have meant that the industry has seen an upturn in profit.
The last year has largely been dominated by plans to change the regulatory environment for insurance providers, mostly through new standards. Various regulatory bodies have been looking at how best to scrutinise a global industry that has been somewhat fractured in the past.
Last year saw two sets of regulatory changes that directly impacted upon the global insurance industry. The Financial Accounting Standards Board (FASB), the body dedicated to developing generally accepted accounting practices (GAAP) in the US, as well as the UK based International Accounting Standards Board (IASB), which is part of the IFRS Foundation, both set out proposals for changes to the way insurance contracts are drawn up and accounted for.
Regulatory reflection
According to accountancy firm PricewaterhouseCoopers (PwC), the new regulations will prove a costly imposition on the industry in the US, and that a global standard needs to be pursued. “In our view, the substantial costs of implementation outweigh incremental benefits of a US GAAP insurance contracts standard that is not converged with IFRS. In the absence of a single, high-quality global standard, we believe the US markets would be better served if the FASB made targeted enhancements to the current US model,” the company stated in a report titled Insurance Modernisation: Insurance Contracts Accounting Proposals.
Towards the end of last year, US insurance regulator the Federal Insurance Office (FIO) also released its report into how the regulatory environment can be modernised for insurance companies in the country. It too called for a more unified regulatory code across the US to help insurance providers avoid excessive costs, as well as allowing consumers a more consistent service.
The ongoing issue of internationally recognised standards for accountancy will continue to present new challenges to the global insurance industry. In the coming years, it is clear that the best way forward will be for both organisations to agree to a set of standards that allows for a level playing field around the world.
PwC adds that this continuing state of change means that insurance companies need to be as flexible as possible in order to avoid costly changes in the future. “In coming years, finance and actuarial functions will be dealing with an unprecedented amount of change that will frame the insurance reporting and solvency landscape for the next generation. These requirements will come into effect at different times, and uncertainty remains about their final form. Accordingly, companies need to develop thoughtful, proactive implementation strategies in order to avoid rework and changes that could ultimately lead to excessive costs and under delivery on original targets.”
Shaun Crawford, Global Insurance Leader at analysts Ernst and Young (EY), wrote in the company’s annual review of the industry that while the industry had emerged from its recent difficulties, it should not expect any drastically improved profits in the immediate future. However, he did point out that there were some areas of growth that presented the industry with opportunity. “Although it remains premature to unequivocally state that the difficult times are behind the industry, many signs point to significant pockets of opportunity. In Asia-Pacific, for example, rising wealth and ageing populations are enticing areas of product expansion and revenue growth.”
He added that the low interest rate environment across the world will continue to present challenges to the industry, and questions just how long the rates will last beyond this year. “Nevertheless, complex challenges lay ahead, chief among them the protractedly low interest rate environment. The question in 2014 is not how low rates may go, but how low they may remain. Another lingering challenge is the often-confounding array of stringent international and national regulations spawned by the financial crisis. Obviously, these enhanced regulations create significant compliance and governance burdens for insurers. Adding to these burdens is the implementation timing of many laws, which remains uncertain.”
Around the world
Although economies in Asia-Pacific experienced a slowdown in growth, as well as the historically low interest rates seen all over the world, many people within the region have enjoyed a rise in their personal wealth. Combined with an ageing population, this has given many insurance providers a number of opportunities for new products.
China’s insurance market has experienced strong growth, according to ratings agency Fitch. Life insurance sales were not constrained by tighter regulations, which included a rule set out in April that ensured low risk and long-duration products would account for at least 20 percent of total premium sales.
However, in Australia the life insurance industry has been severely criticised by the Australian Securities and Investments Commission (ASIC) for its failure to comply with rules on how customers are advised. According to a study of 200 advice files in September, the ASIC found that as much as one third of advisors were breaking the rules. Peter Kell, Deputy ASIC Commissioner, told reporters that such a large failure by the industry was “unacceptable”, adding “the life insurance industry is now on notice to lift standards and professionalism”.
With European economies still suffering from the shock of the eurozone crisis, markets across the continent have enjoyed little more than a period of comparative stability this year. This has, however, led to many insurance firms to address the way in which they do business and to streamline their operations.
Europe’s dramatically low interest rates have meant many firms are not seeing the sort of profits that they had grown accustomed to before the crisis. As a result, these firms have to look at their existing business models, streamlining and simplifying operations. EY has stated: “As insurers watch investment returns dwindle from the impact of low interest rates, they will adjust portfolios and seek to increase yield without taking on significant added risk, most noticeably by seeking new diversification effects.”
As the economy in Europe improves, however, it is likely to cause a rise in both motor and home sales. This will in turn lead to household and car insurance sectors seeing a boost in trade, although this will also likely be quite modest initially.
In the UK, Governor of the Bank of England Mark Carney warned the industry that the BoE would start vetting top officials as part of its fit and proper persons test. This came after some criticism of the industry for mispricing products.
Perhaps one of the regions that offer the industry the most in the way of potential, Latin America is still susceptible to above average catastrophe exposure and volatile inflation. However, the region appears ripe for many insurance providers that are willing to offer out of the ordinary forms of cover, according to EY’s report.
Latin America’s insurance industry is seen as highly competitive, even though the overall market has experienced low penetration rates. For example, life insurance is notoriously low, despite rising prosperity across the continent.
Global trends
There have been a number of issues that have affected the industry on a global level. One area that has seen a lot of focus is the insurance industry’s digital presence. Many within the industry have called for greater investment in digital platforms, such as social media, that will help firms to better connect with customers and also allow consumers to share their service experiences.
According to EY, insurance providers do not spend much more than 10 percent of their IT budgets on digital initiatives, although this was largely expected to increase considerably over the course of the next year. Enhancing social media engagement is seen as a beneficial way of connecting with customers, especially in light of regulatory changes reducing the number of distributors.
At the same time, the uncertainty that has been caused by numerous geopolitical events – from Ukraine to the Middle East – has meant that political risk insurance has soared during the last 12 months. According to the World Bank’s political risk department, many insurers are looking to get in on the political risk market as a result of the surge in activity. Foreign direct investment growth in emerging markets is seen as one reason for this jump in performance, but it also reflects continued turmoil in many parts of the world.
A year of readjustment has put the insurance industry in a better position than it has been in for a long time. However, challenges lie ahead in 2015, and those providers that are going to be successful will need to get the best out of what opportunities there are.
World Finance recognises those companies that have adapted to survive and are currently leading the way, setting the pace heading into the new year.
